Another interest rate hike is looking almost certain on Tuesday, but how much more can our economy take?
The Reserve Bank of Australia (RBA) has already lifted rates 3 times this year, and another 2 increases could be on the way.
According to The Australian, HSBC chief economist Paul Bloxham now puts the risk of Australia falling into recession at around 50%.
He expects the cash rate to reach 4.85% by November, which isn't exactly welcome news for anyone with a mortgage.
With economic growth already slowing, there's a chance the RBA could go too far with rate hikes and push the economy into recession.
So, what does HSBC see coming?
Image source: Getty Images
HSBC sees recession risk climbing
Bloxham expects the RBA to lift the cash rate by 25 basis points tomorrow, taking it from 4.35% to 4.60%.
And while another increase is expected in November, his bigger concern is what those additional rate hikes could do to the economy.
HSBC expects economic growth to come close to stalling around the end of the year, potentially leaving Australia facing a technical recession.
That would mean two consecutive quarters of economic contraction, something we've largely managed to avoid outside the COVID-19 pandemic.
And that's something investors will want to keep an eye on.
Higher borrowing costs and weaker consumer spending could hurt earnings across the ASX, especially among banks and retailers.
Bloxham is also expecting property prices to fall 13% from their peak, which would be the biggest decline in up to 40 years.
That could spell further trouble for housing-related stocks, particularly if fewer people are buying and selling properties.
Not everyone is expecting a recession
Of course, not every economist thinks we're heading for a recession, with Westpac Banking Corp (ASX: WBC) expecting the economy to keep growing.
Its modelling points to quarterly growth of 0.6%, with investment in data centres expected to help keep things moving.
But Bloxham isn't convinced that spending will make much of a difference.
He estimates around 85% of the investment involves imported equipment, meaning much of the money could end up going overseas.
For ASX investors, the next few months will be worth watching, particularly as companies start feeling the impact of higher interest rates.
And while a recession isn't guaranteed, I'd be careful with stocks that depend heavily on people continuing to spend.
What happens next?
Tomorrow's RBA decision is the next big one to watch, followed by Wednesday's inflation figures.
All 29 economists surveyed by Bloomberg expect another 25-basis-point hike this week, although they're not certain about what happens in November.
Nonetheless, the RBA will need to be careful how much further it pushes rates.
